A Matter of Opportunities

The lack of alternative opportunities reduces the cost or enhances the attraction of a given action. On the other hand, the abundance of alternative opportunities increases the cost or reduces the attraction of a given action.

Why are trapped elevator passengers more talkative?

Why is childhood the best time to learn new skills?

Why don't new romances on cruises last much beyond the cruise itself?

Why are campus cafeteria foods generally bad?

Why are foreign workers with equal skills not paid the same as US workers?

Why do good-looking people tend to have a hard time deciding whom to marry?

It all boils down to a matter of opportunities. The lack of alternative opportunities reduces the value of a resource and makes lower-value uses more palatable. This applies to trapped elevator passengers, people on cruises, captive cafeteria customers, children with lots of free time to kill, and foreign workers in countries with few good jobs. Due to lack of more attractive opportunities, they do their best with whatever limited choices they have. On the other hand, the abundance of alternative opportunities increases the value of a resource and makes lower-value uses unattractive. This applies to good-looking people with abundant equally attractive suitors. Whatever choice they end up making, they often wonder if they might not have missed an even better one.

Thinking about cost as the best opportunities foregone and not just as out-of-pocket cash expenses can help us make better allocation of scarce resources.

First, foregone opportunity is a more comprehensive and accurate concept of cost. For example, the opportunity cost of a gainfully employed person going back to school to earn a higher degree includes not just the out-of-pocket expenses of tuition, fees, and books, but also the foregone income that he/she could have earned. The out-of-pocket expenses are also foregone opportunities because they could have been used to purchase something else.

Second, opportunity cost adjusts dynamically with changing circumstances and is not based on historical accounting. In other words, it is forward-looking not backward-looking. For example, the before-the-fact cost of going to a concert includes, among others, the ticket cost and the opportunity cost of your time. But once the ticket is bought, the opportunity cost of going to the same concert is just the salvage value of the ticket and the opportunity cost of your time. If you cannot resell the ticket at all, the opportunity cost consists of just the value of your time. And the value of your concert time might go up or down depending on changing circumstances. On the other hand, if you can resell your ticket for more than what you paid, the opportunity cost of going to the same concert has suddenly gone up even if the value of your concert time stays the same.

Definitions

1. The opportunity cost of something is the best thing you must give up to get it. Foundation of Microeconomics by Bade and Parkin

2. The cost of good or service measured in terms of the lost opportunity to pursue the best alternative activity with the same time or resource. Economics by Dolan & Lindsey 5th edition

The whole idea of cost as best opportunity foregone is another way of saying that we must choose carefully among multiple possible uses for scarce resources.